Human capital is a complex concept to measure given it is an unobserved latent construct. Education is a fundamental dimension of human capital and thus an education-based approach is the one most widely used. However, the international literature recommends a latent-variable approach to measuring human capital. This study thus aims to measure human capital in South Africa, a country experiencing extreme earnings and education inequalities, using a latent-variable approach and the National Income Dynamic Study (NIDS) dataset. The findings are that parental education is associated with the largest amount of variance in (latent) human capital, while the health indicator captures the least variance. Furthermore, the (latent) human capital variable provides a valuable measure to profile the distribution of human capital by socioeconomic subgroups.

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The Human Capital Index (HCI) developed by the [World Bank, 2018a. The human capital project. World Bank. https:// hdl.handle.net/10986/30498 Accessed 26 February 2019] provides a measure which can be used to study human capital (HC) productivity gaps between countries. The HCI uses measures of survival, education and health to estimate, at a country level, the HC 'a child born today can expect to attain by her/his 18th birthday, given the risks of poor health and poor education where she lives' [World Bank, 2018a. The human capital project. World Bank. https://hdl.handle.net/10986/30498 Accessed 26 February 2019, 2]. The socioeconomic disaggregated human capital index (SES-HCI), an extension of the HCI, provides a means for analysing HC inequalities within countries. This study estimates SES-HCIs for South Africa by income quintiles, school quintiles, geographical area, gender and race. The main driver of HC inequalities in all the SES indicators is found to be the quality of schooling. Factors to address the inequalities and the limitations of the measuring instruments are identified.

Piketty’s (2014) book titled “Capital in the Twenty-First Century” sparked widespread interest in global inequality, the distinction between wealth and income inequality and the economic, social and political processes accounting for changes in economic inequality over time. Piketty’s (2014) study controversially stated that widening economic inequality is the normal state of affairs in capitalist societies. The return from capital/wealth (terms used interchangeably) will almost always outpace the returns from labour. In contrast with Piketty’s (2014) thesis that the returns on non-human capital drive growing income inequality, economists such as Leibbrandt et al. (2012), Van der Berg (2014) and Hundenborn et al. (2016) have found that the labour market and human capital (HC) are the primary sources of income inequality. The research problem for this study stems from these contrasting views.